Daily Archives: August 1, 2012

Certain email conversations I’m having lately (which appears to be the preferred mode of communication so far for Diverging Markets readers) lead me to believe that the perils of hard currency debt for developing countries are either not fully understood, viewed as someone else’s problem, or both. At the risk of coming off as though “I told you so”, Reuters has two brief blurbs today concerning the situation in Poland that spell out what I’ve been trying to explain to developing country borrowers for at least half a decade now:

There are two hurdles. One is inflation. Price growth is running at 4.3 percent, well above the 2.5 percent target set by the inflation-targeting central bank. That was what triggered the May rate rise. Second, in Poland, as in Hungary, the central bank cannot afford to let the currency weaken much. A third of government and corporate debt is hard currency, while half of all mortgages are in Swiss francs. A fall in the zloty, caused by a rate cut, could raise defaults and problems for the banks. Continue reading →

“Since June, investors poured about $12 billion into Turkey, doubling the assets purchased by foreigners this year and triggering a rally in government debt that pushed yields on the benchmark two-year bonds down as much as 1.72 percentage points to 7.75%, the lowest since September. The Istanbul Stock Exchange in the same period has risen 17% to more than 65,000, the highest since May 2011…At work is rising risk appetite thanks to efforts by central banks in the developed world to support their economies. As the European Central Bank battles the euro-zone debt crisis and the Federal Reserve hints at a third round of economic stimulus to jump-start the U.S. economy, investors are poised to channel some of that cheap cash from central banks to Turkey, fund managers and analysts say. The country stands out among other emerging-market economies because data signals a rebalancing of the economy driven by surging exports but also underpinned by robust domestic demand.” — WSJ